Now that the United States is a debtor nation, each year that our current account is negative increases the volume of investment dollars that must flow into the country to balance out the outflows from trade, interest and dividends. Foreign investors have been twice blessed with their holdings of US assets the past several years. While the underlying assets have increased in value the increase in the dollar has added to the total return. This of course attracts more money as the virtuous cycle feeds on itself. Sooner or later however, the current account numbers will become too large.
Yes, however... if the perception of the investment public (foreign and domestic), assesses that the US may be the only country in the world that is left with the capacity to repay such debt, then the "utopia" or "love affair" may continue. Or simply if they determine that any other currency/economy is far riskier than the US? In spite of your very valid points.
To what extent are they willing to consider the above ? personally I do not know.
My point here is that what it has become more important for investors,is what country (economy), is the most efficient one to the extent that said economy is capable to service such debt, to a point, regardless of its size.
Alternatively, if the other economies have no chance of presenting any type of strength, then the alternatives are far worse than the US DOLLAR.
Now, why is it that foreign economies can not compete with the US ?
The only chance they have is competing in price (mostly in low to medium skilled jobs/products, although slowly they are competing in more skilled levels), but even then, the needs of their populations keep on rising relentlessly, primarily because their own population growth is high and therefore, social programs keep on growing.
In most cases in these economies, governments control or largely regulated, large sectors of these economies, such as oil, telecommunications, and others. Yes, it is true that many are being "privatized" but in many instances the benefits packages have somehow maintained, (not as the former extent, but still the new owners are somehow restricted in the way they can apply more efficient methods of management, hence becoming more or less productive overall.
You can not change by the mere act of privatization the way things have been done for years. Then we have the factors of corrupted leaders, and inefficient bureaucrats, which only worsens the situation.
The telecommunication industry presents an interesting case.... most of the technology is provided by US companies with patented technology, improved technology allows for considerable reduced costs of running most businesses, like being at the bottom of the pyramid (as far as everyone needing telecommunications).
This applies to all foreign countries as well, the problem here is that, in this instance, telecommunications while necessary to the progress of these countries, historically the local telephone companies have been a good cash cow for the same countries. If they privatized them, they do so at a great cost to these governments. At the same time as already expressed, the new owners can not always benefit from the new environment.
Europe has slightly different problems, in many instances they do possess the technology, but they are again, burdened with excessive welfare programs and/or benefits. Their domestic markets are small, and they are attempting to create the United States of Europe.... but will they succeed?
Can they create the USA without the ideas of Laissez Faire ? Can they become a homogeneous society as the USA, in spite of the drastic differences in philosophies and current economic conditions, say between Spain, Italy, Greece from those of Germany, Scandinavia, England etc..... and then you have the French !
I do not know, it seems to me that if they are capable in creating such, that may give some competition to the US Dollar....
The dollar will flounder and then founder. The cycle will be broken and with investment flows unable to balance the trade outflows the dollar will have absolutely nothing to support it. If you follow currency trends you are familiar with the long trends that occur. They are a trader's dream! The reason of course lies in these self- reinforcing cycles that I am attempting to describe.
At what point, will the USA becomes "too expensive with no further room to be safe, and profitable ?" And at the same time, at which point all these foreign economies become attractively cheap, that it is worth the risk ?
A factor imo that will influence such decision is the current population size, its growth rate, and their skill to become educated, hence more productive, relieving the local governments from having to deviate valuable resources away from social programs that worsens the situation.
How do you measure that ?
The whole picture gets more interesting since now, investors, institutional and individuals (who are increasingly more informed), can move capital more freely and easier from economy to economy.
Allowing the "invisible (and mighty), hand of the market to judge which economy "deserves" their funds. (rewarding perhaps is a better word).
Assistance by governments and or organizations such as the IMF only allows the solutions to be delayed, and for speculators to profit, (and imo rightly so).
Again, the biggest problem I see is the population growth..... it creates more consumers for American (efficient) corporations providing products services and infrastructures that are badly needed in those countries, that in most cases their own economies can not generate, (other than mere labor centers for mostly American companies)..... AND their welfare is paid mostly by said foreign government that in their eternal "wisdom" continue to provide....The only impact they have as it has been already seen is the cheaper labor that competes with the US in specific industries, largely involved in manufacturing of lower technology products.
More or less.... For the USA, it is like enjoying the positives of such population growth, (consumption), yet not be burdened by their welfare (social programs).
Of course my opinion only, and I could be very wrong.
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